In the landscape of Philippine taxation, religious institutions occupy a unique position. Rooted in the constitutional principle of the separation of Church and State, the law provides significant tax maneuvers for these entities, particularly concerning the sale of real property. However, the exemption from Capital Gains Tax (CGT) is not an absolute "get out of tax free" card; it is a conditional privilege governed by specific constitutional mandates and administrative regulations.
I. The Constitutional Foundation
The bedrock of tax exemptions for religious organizations is found in Article VI, Section 28(3) of the 1987 Philippine Constitution, which states:
"Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation."
While this provision primarily addresses Real Property Tax (RPT), the Supreme Court and the Bureau of Internal Revenue (BIR) have historically used the "actual, direct, and exclusive" (ADE) rule as a yardstick for other tax liabilities, including those arising from the disposition of property.
II. Capital Gains Tax vs. Income Tax
In the Philippines, the sale of real property classified as a capital asset is generally subject to a 6% Capital Gains Tax based on the gross selling price or the fair market value, whichever is higher.
For religious non-stock, non-profit corporations, the exemption usually flows from Section 30(E) of the National Internal Revenue Code (NIRC), which exempts corporations or associations organized and operated exclusively for religious purposes, no part of the net income of which inures to the benefit of any private stockholder or individual.
The Distinction of Use
The BIR distinguishes between the nature of the entity and the use of the property:
- Asset Use: If the property sold was actually, directly, and exclusively used for religious purposes (e.g., a church building or a convent), the gain from the sale is generally exempt, provided the proceeds are reinvested in pursuit of the organization's religious mission.
- Incidental Income: If a religious organization owns a commercial lot (not used for worship) and sells it, the BIR may argue that the 6% CGT applies, as the property itself was not part of the "religious" infrastructure protected by the ADE rule.
III. The "Reinvestment" Requirement
Consistent with the treatment of other tax-exempt entities, the BIR often looks at the utilization of proceeds. Under various BIR Rulings, for a sale to remain exempt from the taxes usually triggered by the disposition of assets:
- The organization must maintain its status as a non-stock, non-profit entity.
- The proceeds from the sale must be used to further the religious purposes of the organization.
- No part of the gain should be distributed to members or trustees.
IV. Administrative Requirements (Compliance)
An exemption is not automatic upon the signing of a Deed of Sale. To legally avoid the 6% CGT and have the Certificate Authorizing Registration (CAR) issued by the BIR, the religious organization must typically present:
- SEC Registration: Articles of Incorporation and By-Laws proving non-stock, non-profit religious status.
- Tax Exemption Ruling: A valid and updated Certificate of Tax Exemption (CTE) issued by the BIR.
- Affidavit of Actual, Direct, and Exclusive Use: A sworn statement confirming the property's use prior to the sale.
- Board Resolution: Authorizing the sale and stating the intended religious use of the proceeds.
V. Jurisprudence and the "Strictissimi Juris" Rule
Philippine courts apply the principle of strictissimi juris—tax exemptions are construed strictly against the taxpayer and liberally in favor of the government.
In the landmark case of Lung Center of the Philippines v. Quezon City (while a real property tax case, the principle carries over), the Court clarified that if a portion of the property is used for commercial purposes (e.g., leased out to a coffee shop), that specific portion loses its exempt status. Consequently, if a religious organization sells a "mixed-use" property, the CGT may be applied pro-rata to the portion not used for religious activities.
VI. Summary Table: Taxability of Property Sales
| Property Type | Usage Condition | CGT Status |
|---|---|---|
| Place of Worship | Actually, directly, and exclusively used for religion. | Exempt |
| Parsonage/Convent | Residence for the clergy appurtenant to the church. | Exempt |
| Vacant/Investment Lot | Held for future use or appreciation, not currently used for worship. | Likely Taxable |
| Leased Property | Property owned by the church but rented to a business. | Taxable |
Conclusion
While the Philippine State recognizes the vital role of religious institutions by granting them tax leniency, the exemption from Capital Gains Tax is strictly tied to the functional use of the property and the non-profit character of the transaction. Organizations must ensure meticulous documentation and proof of "actual, direct, and exclusive" use to successfully claim immunity from the 6% CGT during the transfer of titles.